Jamaica
Could Fraud Be Eroding Your
Profit Margin?
What you don’t know may be hurting you…
This is the first in a series of briefings prepared by PricewaterhouseCoopers on how general insurance companies in
Jamaica can respond to the rising threat of fraud.
Could Fraud Be Eroding Your Profit Margin?
Could Fraud Be Eroding Your Profit Margin?
According to the global Economic Crime Survey (ECS) 2009 prepared by
PricewaterhouseCoopers, over 6% of a company’s overall turnover is potentially being lost to
fraud. The insurance industry in particular, is historically one of those most affected by fraud
and this coupled with the economic recession is proving too significant a burden to bear for
many. In Jamaica, an added consideration is the impact of the Jamaica Debt Exchange (JDX),
which has had the effect of substantially decreasing investment income, traditionally a key
source of revenue for insurance companies. This cocktail of circumstances has challenged
organisations to identify mechanisms in the war to protect the bottom line – with sustained
reductions in fraud being one tool in the arsenal.
Fraud is defined as any intentional or deliberate act to deprive another of money or property by guile, deception or
other unfair means. Fraud against a general insurance company is usually in the form of fictitious or overstated
claims or understated/underreported premiums. Frauds may be due to organised criminal activities, such as when
criminal elements take out insurance policies with the specific intent of committing a fraud or frauds may occur
because an opportunity presents itself e.g. where firms or individuals take advantage of weaknesses in a
company’s system of internal controls.
Increasing pressure on your company’s bottom line
Traditionally, general insurance companies relied heavily on investment income to bolster their bottom line,
making minimal underwriting profits and in some instances underwriting losses. The existence of fraud was
known and accepted as a normal cost of doing business, however, companies made returns which were largely
considered to be acceptable by shareholders and other stakeholders.
The JDX resulted in companies replacing high yielding Government of Jamaica investments for lower yielding
ones, and by extension, reduced investment income and exerted a strong downward pressure on the profits of
many insurance companies. Fraud however is on the rise and actively threatens the quest to maintain the bottom
line and keep shareholders and other stakeholders happy.
Globally, fraud is estimated to average in excess of 6% of total income. Given Jamaica’s culture of “beating the
system”, and with the prolonged recession, this loss is arguably much greater than the global average. In a 2007
Association of British Insurers’ (ABI) study, the cost of fraud in the UK approximated 10% of gross premium
income. Fraud directly impacts the bottom line. The PricewaterhouseCoopers ECS confirms that no company is
immune. In fact larger companies report a higher number of frauds (possibly attributable to better detection
mechanisms). There is an increased incentive for fraud. The Global ECS showed that there had been an increase
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Could Fraud Be Eroding Your Profit Margin?
in the incidence and cost of fraud over the previous year. The greatest influence contributing to this increase was
the significant pressure associated with the economic downturn.
For an insurance company, its ability to manage fraud may have a direct impact on its competitive position as a
higher incidence of fraud reduces its ability to price its policies competitively.
Moving Towards Fraud-Proofing Your Company
Despite the challenging environment and the propensity for fraud, your company can fight back! A proactive
response is essential to reducing fraud. It is far better to put the mechanisms in place to prevent and detect fraud
early, rather than to do damage control after an incident.
But what does it mean for a general insurance company to be proactive?
A proactive response would mean that you:
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Know the incidence and cost of fraud in your industry and company.
Know the “fraud culture” within your organisation by performing regular, high level diagnostics of your
business and business practices. In this diagnostic you would identify the characteristics of your ‘fraud culture’
which may leave you vulnerable to fraud. We have included a free-to-use fraud diagnostic
at www.surveymonkey.com/s/FraudRiskAssessment. Take the test and see where your organisation currently
stands.
Perform regular fraud risk assessments in order to know the fraud schemes that your company is most
vulnerable to. It is generally accepted that you cannot manage risks you are not fully aware of. Fraud risk is
unique and different from other organisational risks and therefore, a specific fraud risk assessment is
necessary. This fraud risk assessment goes a level deeper than the fraud diagnostic, through a systematic
consideration of the known fraud schemes, risk of occurrence and the controls in place to address them.
Understand that good operational controls may not be enough to protect you against fraud! Anti-fraud
controls may be needed to prevent and detect fraud in the normal course of business. Anti-fraud controls are
those controls which are specifically designed to address fraud schemes to which a company is vulnerable.
Perform regular fraud audits to detect fraud before it becomes a significant problem. A fraud audit is different
from other audits in that it is specifically designed to identify whether fraud schemes to which the company is
vulnerable have actually occurred. The fraud audit should be guided by the fraud risk assessment.
Designate an anti-fraud champion within your organisation who is responsible for keeping up to date with the
fraud schemes affecting the industry and ensuring that there is adequate training, knowledge transfer and
awareness of the potential for fraud within the organisation.
In the next briefing, we will explore with you the issue of claims fraud and how to manage your exposure to this
type of risk.
Carolyn Bell-Wisdom CFE, author of this briefing, is a Certified Fraud Examiner and a Senior Manager in the Fraud
Risk & Controls Practice of PricewaterhouseCoopers Jamaica.
PricewaterhouseCoopers
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For further information…
Could Fraud Be Eroding Your Profit Margin?
Bruce Scott, CFE
Partner
Global Risk Management
Solutions
: 876.932.8335
: [email protected]
Carolyn Bell-Wisdom, CFE
Senior Manager
Global Risk Management
Solutions
: 876.932.8314
: [email protected]
Debra Dodd, CFE
Senior Manager
Global Risk Management
Solutions
: 876.932.8342
: [email protected]
Peta-Gaye Bartley, CFE
Manager
Global Risk Management Solutions
: 876.922.6230
: [email protected]
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional
advice. You should not act upon the information contained in this publication without obtaining specific professional
advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information
contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume
any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in
reliance on the information contained in this publication or for any decision based on it.
© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the Jamaica firm of
PricewaterhouseCoopers or, as the context requires, the PricewaterhouseCoopers global network or other member firms
PricewaterhouseCoopers
of the network, each of which is a separate legal entity.
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